Interest rates stimulative enough: Bank of Canada's Schembri

Mina Mohit

3 Min Read

LONDON, Ontario (Reuters) - - Official interest rates in Canada are low enough to stimulate growth and close the output gap by the middle of 2018, Bank of Canada Deputy Governor Lawrence Schembri said on Thursday.

Speaking to a university audience after a speech on inflation measures, Schembri said achieving consensus among policymakers to set official interest rates was “relatively straightforward,” suggesting there is little dispute around the table as the Bank of Canada continues to hold rates steady.

“What we’ve set is an interest rate that we feel is sufficiently stimulative to ... close the output gap and to get us back to our inflation target by the middle of 2018,” Schembri said during a question and answer session.

Schembri said policymakers receive economic projections and a recommendation on interest rates by Bank of Canada staff, which the governing council discusses before coming to a consensus on monetary policy.

“Given that we’re seeing a lot of the same information, it’s relatively straightforward to come to a consensus,” Schembri told an audience at Western University’s economics department.

The bank makes decisions unanimously, as opposed to the Federal Reserve, which votes on U.S. monetary policy.

Bank of Canada Governor Stephen Poloz said in January a rate cut “remains on the table” if the risks facing the country’s economy are realized. The bank has held rates steady at 0.5 percent since cutting them twice in 2015, citing labor market slack and an output gap that the bank does not expect to close until mid-2018.

In a speech outlining the role of the inflation measures the bank uses to guide interest rate decisions, Schembri said policymakers are aware of the weaknesses of the gauges and considers other factors when setting official borrowing costs.

“We use core inflation to give us a sense of where the economy is at the moment, essentially what the starting point for our projection is,” he said.

The divergence of the three measures of core inflation used by the Bank of Canada is not a weakness, but rather validates the central bank’s decision to use all three to measure price pressures in the economy, Schembri said.

The Bank of Canada switched from using one measure of core inflation to three late last year: CPI-trim, CPI-median and CPI-common, which economists have said makes it difficult to know what policymakers are watching most closely.

Reporting by Andrea Hopkins and Leah Schnurr; Editing by James Dalgleish